Preliminary Results

RNS Number : 6819A

Sound Energy PLC

28 March 2017

 

28 March 2017

SOUND ENERGY PLC

("Sound Energy" or the "Company")

Unaudited Preliminary Results for the year ended 31 December 2016

Sound Energy, the European and African focused upstream oil and gas company, announces its unaudited preliminary results for the year ended 31 December 2016.

2016 Highlights

·     Recent low-cost multi-Tcf potential Moroccan discovery

·     Two successful wells drilled on Tendrara with flow rates significantly exceeding expectations

·     Preparations for drilling Badile exploration prospect in Italy completed - drilling now underway post period end

·     Consolidation of Moroccan position with acquisition of Sidi Moktar and Meridja option

·     Successful £26.9 million institutional and retail placing

·     Cash balance at 31 December 2016 of £46.8 million

·     Broadening of Executive Team, including the appointment of Brian Mitchener as Executive Vice President Exploration

For further information please contact:

Vigo Communications - PR Adviser Patrick d'Ancona Chris McMahon Alexandra Roper	Tel: [phone]
Sound Energy James Parsons, Chief Executive Officer	[e-mail]
Smith & Williamson - Nominated Adviser Azhic Basirov David Jones Ben Jeynes	Tel: [phone]
RBC - Broker Matthew Coakes Martin Copeland Laura White	Tel: [phone]

Statement from the Chairman and Chief Executive Officer

Despite being another turbulent period for the energy sector, 2016 has been truly transformational for Sound Energy.  We have continued to build an exploration focused onshore Mediterranean gas business hinged on strong European gas fundamentals, a strategic partnership with Schlumberger and a low cost multi Tcf potential development asset in Morocco. 

Our focus during 2016 has been to pursue a high impact exploration campaign in Eastern Morocco (drilling TE-6 and TE-7) whilst finalising preparations to drill Badile in Northern Italy.  Alongside this, we have continued to develop our high quality partnerships, maintain a strong balance sheet and ensure our operations are safe and sustainable. 

Morocco

The Eastern Morocco TAGI and Paleozoic plays across Tendrara / Meridja have the potential to become a material hydrocarbon province on a regional scale and therefore transform both Sound Energy and the Moroccan gas industry. 

Tendrara

The results from Tendrara have been pivotal to the Company's success during 2016.

Following the introduction of Schlumberger as a strategic partner in late 2015, Sound commenced drilling at its first well, TE-6, in April 2016.  This well was completed, stimulated and tested over the summer with petrophysical analysis confirming the presence of a number of gas bearing levels, a total net pay of 28 metres in the TAGI reservoir and a flow rate of 17 MMscf/d - a rate that was significantly above expectations and highly commercial.

After the resounding success of the first well, the Company commenced drilling at its second well, TE-7, in August 2016.  In November, TE-7 achieved a gas flow rate post-stimulation of 32 MMscf/d, which again significantly exceeded expectations and confirmed the benefits of sub-horizontal drilling.  Following the period end, the well was put on an extended well test to confirm production sustainability and to aid field development planning with just under 1.0 Bcf flowing from TE-7 over 56 days, with rates between 15 MMscf/d to 28 MMscf/d achieved.  The well is now in a final pressure build-up phase.

From the results to date, Sound has been able to estimate that the TE-5 Horst area contains around 300-500 Bcf gas, is commercial and intends to apply for a concession to develop and produce from this field.

Following these results, the Company took the decision to drill a bold step-out well, TE-8, 12km to the north-east of TE-6 and TE-7.  Logging at TE-8 has recently confirmed the extension of the TAGI reservoir and successfully identified and penetrated the full sequence of Westphalian sands in the Paleozoic.  Despite lower quality TAGI sands than in the previous wells, this is the first well to establish the Westward extension of the primary hydrocarbon system proven in Algeria into Morocco.

The Company will now take sidewall core samples and then suspend TE-8 in preparation for future operations, which may include mechanical  stimulation of this well or a sidetrack.  The Company will also update its static geological models and volumetric evaluation.  This is likely to include an immediate re-entry of the TE-1 well, in the south of the Tendrara licence area, drilled by Agip in 1966.

Meridja

During 2016, the Company secured, subject to regulatory and other approvals, a 55% interest in the Meridja exploration permit, which is adjacent to Tendrara and shares the same fundamental geology. Following the period end this interest was successfully increased, subject to regulatory approvals, to 75% following a successful partnership transaction with OGIF in early 2017, when a further 20% of Tendrara was also conditionally acquired. The remaining 25% interest continues to be held by Morocco's Office National des Hydrocarbures et des Mines (ONHYM). The potential of this area will begin to be unlocked through 2017 and 2018, with the acquisition of seismic and an aerial gradiometry survey.

Sidi Moktar

In early 2016, Sound acquired a 75% interest in the Sidi Moktar licences area in the Essaouira basin, central Morocco.  These licences contain an existing gas discovery in the Lower Liassic (Kechoula) with two wells drilled on structure. Sound plans to work-over these existing wells and test. We have also agreed Heads of Terms to farmout a portion of the licence, de-risking the asset financially. The deeper exploration potential of the licences in the Triassic also holds considerable interest.

Italy

Badile

Much progress was made during the year on the Badile licence in Italy, the second of our strategic plays, with the "Conferenza dei Servizi", the central and final approval meeting, successfully concluding in late April 2016 and the final permission to drill received from the Italian Ministry of Economic Development (UNMIG) in May 2016. Civil works commenced in September 2016 and the Company was pleased to report following the period end that the Moirago-1 Badile exploration well was spud in March 2017. The first two casing points have been successfully reached and the Company looks forward to communicating results during 2017.

During July 2016, the relationship with Schlumberger was also further strengthened with Schlumberger agreeing to fund €7.5 million of services (30% of the estimated well cost) in exchange for an option to acquire a 20% net profit interest. Badile remains a strategic asset in our portfolio.

Remaining Italian Portfolio

The Company has a broad portfolio in Italy which includes existing production and Laura, a high quality existing discovery where the Company plans to drill the appraisal well, 4km offshore, from onshore with a long reach deviated well.

Corporate

The Company is in a strong financial position as it enters 2017, with a cash balance of £46.8 million as at 31 December 2016. We continue to operate with a low cost but high quality philosophy, working with strategic partners to technically and financially de-risk assets and continuing to benefit from the support of our cornerstone investors. We successfully refinanced the significant majority of the Company's debt during 2016, extending the timeframe, and raised £26.3 million (gross) of equity funding in an innovative capital raise, where private investors were invited to invest alongside institutions.

During 2016, Simon Davies stepped down as Chairman of the Company to pursue other interests, with Stephen Whyte taking on the mantle of the Chairmanship in early July. The executive management team has been expanded to enable us to deliver our exploration and acquisition plans, with the introduction of Brian Mitchener (Executive Vice President  Exploration).  Sound Energy was also, during 2016, awarded AIM Company of the Year and included in the MSCI UK Small Cap Index.

The momentous progress achieved by Sound Energy during 2016 would not have been possible without the efforts of Sound Energy's executive team, our supportive shareholders and other stakeholders including our host governments. We would like to take this opportunity to thank all of them as we continue delivering our strategy.

Stephen Whyte                                         James Parsons

Chairman                                                  CEO 

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2016

	Notes	(Unaudited) 2016 £'000s	(Audited) 2015 £'000s
Revenue		833	859
Other income	2	715	-
Operating costs		(1,110)	(538)
Impairment of producing assets	5	(5,455)	(6,347)
Impairment of goodwill	6	(1,704)	-
Exploration costs	6	(2,334)	(5,838)
Gross loss		(9,055)	(11,864)
Administrative expenses		(6,241)	(3,181)
Group operating loss from continuing operations		(15,296)	(15,045)
Finance revenue	3	1,364	52
Foreign exchange gain/(loss)		1,935	(1,389)
Other gains and (losses)
-derivative financial instruments	9	583	-
External interest costs		(3,769)	(1,905)
Loss for the year before taxation		(15,183)	(18,287)
Tax credit/(expense)		1,744	-
Loss for the year after taxation		(13,439)	(18,287)
Foreign currency translation		375	(320)
Total comprehensive loss for the year		(13,064)	(18,607)
Loss for the year attributable to:
Owners of the company		(13,064)	(18,607)
Non-controlling interests		-	-

	Notes	(Unaudited) 2016 Pence	(Audited) 2015 Pence
Loss per share and diluted for the year	4	(2.52)	(3.90)
Attributable to the equity shareholders of the parent (pence)	4	(2.52)	(3.90)

 

Consolidated Balance Sheet

as at 31 December 2016

	Notes	(Unaudited) 2016 £'000s	(Audited) 2015 £'000s
Non-current assets
Property, plant and equipment	5	1,729	5,558
Intangible assets	6	28,060	9,564
Land and buildings		1,535	1,327
		31,324	16,449
Current assets
Inventories		331	-
Other receivables		8,777	2,506
Prepayments		320	99
Derivative financial instruments	9	2,545	-
Cash and short term deposits		46,809	15,240
		58,782	17,845
Total assets		90,106	34,294
Current liabilities
Trade and other payables		12,604	2,097
Loans repayable in under one year	8	986	5,751
		13,590	7,848
Non-current liabilities
Deferred tax liabilities		433	1,992
Loans due in over one year	8	16,455	7,157
Provisions		2,049	1,138
		18,937	10,287
Total liabilities		32,527	18,135
Net assets		57,579	16,159
Capital and reserves
Share capital and share premium		135,667	86,315
Shares to be issued		223	-
Warrant reserve		4,459	369
Foreign currency reserve		1,443	1,068
Accumulated deficit		(84,213)	(71,593)
Total equity		57,579	16,159

 

Consolidated Statement of Changes in Equity

for the year ended 31 December 2016

	Notes	Share capital £'000s	Share premium £'000s	Shares to be issued £'000s	Accumulated deficit £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2016		5,039	81,276	-	(71,593)	369	1,068	16,159
Total loss for the year		-	-	-	(13,439)	-	-	(13,439)
Other comprehensive income		-	-	-	-	-	375	375
Total comprehensive loss		-	-	-	(13,439)	-	375	(13,064)
Issue of share capital		1,612	50,425	-	-	-	-	52,037
Share issue costs		-	(2,685)	-	-	-	-	(2,685)
Shares to be issued		-	-	223	-	-	-	223
Fair value of warrants issued with bonds		-	-	-	-	4,090	-	4,090
Share based payments		-	-	-	819	-	-	819
At 31 December 2016 (unaudited)		6,651	129,016	223	(84,213)	4,459	1,443	57,579

	Notes	Share capital £'000s	Share premium £'000s	Accumulated deficit £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2015		4,153	67,145	(53,621)	369	1,388	19,434
Total loss for the year		-	-	(18,287)	-	-	(18,287)
Other comprehensive income		-	-	-	-	(320)	(320)
Total comprehensive loss		-	-	(18,287)	-	(320)	(18,607)
Issue of share capital		886	15,342	-	-	-	16,228
Share issue costs		-	(1,211)	-	-	-	(1,211)
Share based payments		-	-	315	-	-	315
At 31 December 2015 (audited)		5,039	81,276	(71,593)	369	1,068	16,159

 

Consolidated Cash Flow Statement

for the year ended 31 December 2016

	Notes	(Unaudited) 2016 £'000s	(Audited) 2015 £'000s
Cash flow from operating activities
Cash flow from operations		(2,826)	(3,487)
Interest received		96	52
Net cash flow from operating activities		(2,730)	(3,435)
Cash flow from investing activities
Capital expenditure and disposals		(945)	(1,156)
Exploration and development expenditure		(10,882)	(6,545)
Net cash flow from investing activities		(11,827)	(7,701)
CSTI funding contract		(14)	(117)
Net proceeds from debt		10,248	-
Net proceeds from equity issue		40,247	15,017
Repayment of debt		(5,435)	-
Interest payments		(1,108)	(1,051)
Net cash flow from financing activities		43,938	13,849
Net increase in cash and cash equivalents		29,381	2,713
Net foreign exchange difference		2,188	(81)
Cash and cash equivalents at the beginning of the year		15,240	12,608
Cash and cash equivalents at the end of the year		46,809	15,240

Notes to Cash Flow

for the year ended 31 December 2016

	Notes	(Unaudited) 2016 £'000s	(Audited) 2015 £'000s
Cash flow from operations reconciliation
Loss before tax		(15,183)	(18,287)
Finance revenue	3	(1,364)	(52)
Goodwill impairment		1,704	-
Exploration expenditure written off and impairment of producing assets		7,789	12,185
Increase/(decrease) in accruals and short term payables		9,035	(97)
Depreciation	5	272	136
Share based payments charge		819	315
Purchase of drilling inventories		(331)	-
Gain on derivative financial instruments		(583)	-
Finance costs and exchange adjustments		1,508	2,588
Increase in receivables		(6,492)	(275)
Cash flow from operations		(2,826)	(3,487)

Non-cash transactions during the year included the issue of shares worth £7.4 million as the consideration for the Sidi Moktar licences acquisition. The Company settled £4.3 million of the previously outstanding £7.0 million debt with Continental Investment Partners in lieu of the receipt of new issue bond proceeds of an equivalent amount.

During the year, the Company provided a bank guarantee of $2.5 million (2015: $2.75 million) to the Moroccan Ministry of Petroleum to guarantee the Company's minimum work programme obligations. As the Company expects to satisfy these commitments within 2017, this amount remains included as a liquid cash equivalent. A guarantee of €0.8 million was provided for the first well at the Badile licence in Italy and is included in cash and cash equivalents as it  is expected to be released as soon as the work commitment is fulfilled.

Notes to the Financial Statements

1 Basis of preparation

The financial information contained in this unaudited preliminary announcement does not constitute accounts as defined by section 434 of the Companies Act 2006. The financial information for the year ended 31 December 2015 is derived from the statutory accounts for that period which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2016 will be finalised based on the information in this unaudited preliminary announcement and will be delivered to the Registrar of Companies in due course. The Group has prepared its consolidated financial statements for the year ended 31 December 2016 in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The accounting policies applied are consistent with those included in the financial statements of the Group for the year ended 31 December 2015.

2 Segment information

The Group categorises its operations into three business segments based on corporate, exploration and appraisal and development and production.

In the year ended 31 December 2016 the Group's exploration and appraisal activities were carried out in Italy and Morocco.

The Group's reportable segments are based on internal reports about components of the Group which are regularly reviewed and used by the Board of Directors, being the Chief Operating Decision Maker ("CODM"), for strategic decision making and resource allocation, in order to allocate resources to the segment and to assess its performance.

Details regarding each of the operations of each reportable segment is included in the following tables.

Segment results for the year ended 31 December 2016:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Sales and other operating revenues	-	833	-	833
Other income	-	715	-	715
Operating costs	-	(1,110)	-	(1,110)
Exploration costs	-	-	(2,334)	(2,334)
Impairment of producing assets	-	(5,455)	-	(5,455)
Goodwill impairment	-	(524)	(1,180)	(1,704)
Administration expenses	(6,241)	-	-	(6,241)
Operating loss segment result	(6,241)	(5,541)	(3,514)	(15,296)
Interest receivable	2,152	-	-	2,152
Gain on derivative financial instruments	583	-	-	583
Finance costs and exchange gains	(2,622)	-	-	(2,622)
Loss for the period before taxation	(6,128)	(5,541)	(3,514)	(15,183)

Other income represents receipt during the year of $1.1 million Indonesian contingent consideration, triggered by the achievement of various operational targets of the Bangkanai licence which was previously owned by the Group. A contingent asset was not recognised when the licence was disposed of due to the uncertainty around the achievement of the conditions leading to the payment.

Segment revenue reported above represents revenue generated from external customers. All the revenue arose from operations in Italy.

The segments assets and liabilities at 31 December 2016 were as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Non-current assets	513	1,216	29,595	31,324
Current assets	52,526	22	6,234	58,782
Total liabilities	(3,161)	(2,049)	(27,317)	(32,527)

The geographical split of non-current assets is as follows:

	UK £'000s	Italy £'000s	Morocco £'000s
Development and production assets	-	1,216	-
Land and buildings	-	1,535	-
Fixtures, fittings and office equipment	194	171	148
Goodwill	-	433	-
Exploration and evaluation assets	-	8,511	18,876
Software	89	6	145
Total	283	11,872	19,169

Segment results for the year ended 31 December 2015 were as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Sales and other operating revenues	-	859	-	859
Operating costs	-	(538)	-	(538)
Exploration costs	-	-	(5,838)	(5,838)
Impairment of producing assets	-	(6,347)	-	(6,347)
Administration expenses	(3,181)	-	-	(3,181)
Operating loss segment result	(3,181)	(6,026)	(5,838)	(15,045)
Interest receivable	52	-	-	52
Finance costs	(3,294)	-	-	(3,294)
Loss for the period before taxation	(6,423)	(6,026)	(5,838)	(18,287)

 

The segments assets and liabilities at 31 December 2015 are as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Non-current assets	137	5,391	10,921	16,449
Current assets	17,845	-	-	17,845
Total liabilities	(7,743)	(1,498)	(8,894)	(18,135)

The geographical split of non-current assets is as follows:

	UK £'000s	Italy £'000s	Morocco £'000s
Development and production assets	-	5,391	-
Land and buildings	-	1,327	-
Fixtures, fittings and office equipment	37	101	29
Goodwill	-	1,992	-
Exploration and evaluation assets	-	6,960	512
Software	100	-	-
Total	137	15,771	541

3 Finance Revenue

	2016 £'000s	2015 £'000s
CSTI obligation released	1,268	-
Interest on cash at bank and short term deposits	96	52
	1,364	52

4 Profit/(loss) per share

The calculation of basic profit/(loss) per Ordinary Share is based on the profit/(loss) after tax and on the weighted average number of Ordinary Shares in issue during the period. Basic profit/(loss) per share is calculated as follows:

	2016 £'000s	2015 £'000s
Loss after tax from continuing operations	(13,439)	(18,287)

 

	2016 million	2015 million
Weighted average shares in issue	534	467

 

	2016 pence	2015 pence
Loss per share (basic) from continuing operations	(2.52)	(3.90)

 

5 Property, plant and equipment

	2016 £'000s	2015 £'000s
Development and production assets
Cost
At start of the year	14,297	15,566
Exchange adjustments	785	(957)
Additions	886	234
Reversal of capitalised interest	-	(546)
At end of the year	15,968	14,297
Depreciation
At start of the year	8,906	2,454
Exchange adjustments	187	-
Impairment of assets	5,455	6,347
Charge for the year	204	105
At end of the year	14,752	8,906
Net book amount	1,216	5,391
Fixtures, fittings and office equipment
Cost
At start of the year	377	273
Exchange adjustments	33	(10)
Additions	405	120
Disposal		(6)
At end of the year	815	377
Depreciation
At start of the year	210	185
Exchange adjustments	24	(4)
Charge for the year	68	31
Disposals	-	(2)
At end of the year	302	210
Net book amount	513	167
Total net book amount	1,729	5,558

The Group reviewed the carrying value of the Casa Tonetto licence in view of the reservoir performance being below expectations upon commencement of production at the beginning of 2016 and recognised an impairment charge of £5.4 million (2015: £6.3 million) to write-off the carrying value to the recoverable amount of £0.5 million, being the fair value less costs to sell of the plant and equipment. The valuation was considered a Level 3 valuation.

	2016 £'000s	2015 £'000s
Italy - impairment	5,455	6,347
Total	5,455	6,347

 

6 Intangibles

	Goodwill £'000s	Software £'000s	Exploration & Evaluation Assets  £'000s	2016 £'000s
Cost
At 1 January 2016	1,992	106	18,100	20,198
Additions	-	176	21,176	21,352
Exchange adjustments	210	-	626	836
At 31 December 2016	2,202	282	39,902	42,386
Impairment
At start of the year	-	6	10,628	10,634
Charge for the year	1,704	36	1,819	3,559
Exchange adjustments	65	-	68	133
At end of the year	1,769	42	12,515	14,326
Net book amount at 31 December 2016	433	240	27,387	28,060

 

	Goodwill £'000s	Software £'000s	Exploration  & Evaluation Assets  £'000s	2015 £'000s
Cost
At 1 January 2015	2,099	91	11,758	13,948
Additions	-	15	6,545	6,560
Transfers	-	-	-	-
Exchange adjustments	(107)	-	(203)	(310)
At 31 December 2015	1,992	106	18,100	20,198
Impairment
At start of the year	-	-	5,060	5,060
Charge for the year	-	6	5,568	5,574
At end of the year	-	6	10,628	10,634
Net book amount at 31 December 2015	1,992	100	7,472	9,564

The impairment charge of £1.8 million recognised during the year for the exploration and evaluation assets related to the Strombone licence. The 2015 impairment charge of £5.6 million primarily related to the Carita licence. Impairment charges associated with exploration and evaluation assets are included within Exploration costs in the Consolidated Statement of Comprehensive Income.

Goodwill arises on acquisitions accounted for at fair value and consists largely of the synergies expected from combining acquired operations with those of the Group. In accordance with IFRS, goodwill is assessed annually for impairment. The carrying value of the goodwill is linked to the development and exploration and evaluation assets. During the year, impairment charges were recognised for the Casa Tonetto and Strombone licences, which has led to £1.7 million of goodwill (2015: £nil) that is linked to these licences being impaired. The Company has no goodwill.

  

Exploration and Evaluation Assets

Details regarding the Geography of the Group's Exploration and Evaluation assets is contained in note 2.  The Directors assess for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. In making this assessment the Directors have regard to the facts and circumstances noted in IFRS 6 paragraph 20. In performing their assessment of each of these factors at 31 December 2016 the Directors have:

a)   reviewed the time period that the Group has the right to explore the area and noted no instances of expiration, or licences that are expected to expire in the near future;

b)   determined that further exploration or evaluation expenditure is either budgeted or planned for all licences (with the exception of the licence noted below);

c)   not decided (with the exception of the licence noted below), to discontinue exploration activity due to there being a lack of quantifiable mineral resource; and

d)   not identified any instances where sufficient data exists to indicate that there are licences where the E&E spend is unlikely to be recovered from successful development or sale.

One licence, in Italy, was identified where current and forecast operational spend has significantly decreased due to an application for a time extension on the licence being rejected. As a result, an impairment charge of £1.8 million has been recognised, being the carrying value of the asset at the date of impairment.

During the year, the Group had capitalised interest costs of approximately £1.5 million (2015: £0.5 million).

7 Capital and Reserves

	2016 Number of shares	£'000s	2015 Number of shares	£'000s
Ordinary shares - 1p	665,069,037	6,651	503,898,868	5,039

		Number of shares 2016		Number of shares 2015
At 1 January		503,898,868		415,300,815
Issued during the year for cash		118,147,455		88,598,053
Non-cash share issue		43,022,714		-
At 31 December		665,069,037		503,898,868

The non-cash share issue is the consideration paid for the acquisition of 75% interest in Sidi Moktar licences, onshore Morocco.

Share option schemes

Options to subscribe for the Company's shares were granted to executives and certain employees in 2016 and 2015.

Share Issues

During the year ended 31 December 2016, the Company issued 81,063,916 shares following warrant exercises at exercise prices in the range of 10.4p to 30p per share.                    

On 29 July 2016, the Company announced the issue of 300,000 shares following the exercise of share options by a former employee at a price of 16.5p per share.                                            

On 8 August 2016, the Company announced the issue of 1,780,000 shares following the exercise of expiring share options by a director of the Company at prices in the range of 16.5p to 25p per share.      

On 13 October 2016, the Company announced the issue of 1,288,888 shares following the exercise of share options by a non-board member of the Company at a price of 12.15p per share.

On 25 November 2016, the Company announced the issue of 33,239,323 shares to satisfy the applications received for its underwritten offer. The shares were issued at a price of 81p per share.

On 12 December 2016, the Company announced that it would issue 43,022,714 shares as consideration for the acquisition of 75% interest in Sidi Moktar licences, onshore Morocco.

During December 2016, the Company issued 475,328 shares to partly satisfy the exercise of 2,279,998 share options by a non-board member of the Company. The remaining shares were reported as shares to be issued within equity as at 31 December 2016 and were issued subsequent to the year end. The options were exercised at prices in the range of 16.5p to 25p per share.           

8 Loans and Borrowings

				2016		2015
				£'000		£'000
Current Liabilities
Other loans				986		5,751
Non-Current Liabilities
5 year secured bonds				16,455		-
Other loans				-		7,157
				16,455		7,157

On 21 June 2016 the Company announced that Greenberry S.A (''Greenberry'') had subscribed for 5-year non-amortising secured bonds with an aggregate issue value of €28.8 million (the "Bonds"). Alongside the Bonds, the Company issued 70,312,500 warrants to subscribe for new ordinary shares in the Company at an exercise price of 30 pence per ordinary share and an exercise period of approximately five years, concurrent with the term of the Bonds, to Greenberry (the "Warrants"). The Bonds are secured over the share capital of Sound Energy Holdings Italy Limited. The Bonds have a 5% coupon and were issued at a 32% discount to par value. A total cash fee of €1.1 million was payable by the Company.           

The Warrants were recorded within equity at fair value on the date of issuance and the proceeds of the notes net of issue costs were recorded as a non-current liability. Part of the Bonds proceeds were used to settle an existing Reserve Based Lending facility with Greenberry of €7.0 million at a discount of 50%. The Company also settled £7.0 million debt that had been issued to Continental Investment Partners in 2014 as part of the re-financing. The coupon rate of 5% for the Bonds ensures that the Company's on-going cash out-flow on interest payments remains low, conserving the Company's cash resources. The effective interest rate is approximately 16.3%. The 5-year secured Bonds are due in June 2021.

The £7.0 million settled was the debt issued to Continental Investment Partners with an annual coupon of 8% on 28 July 2014, which was issued alongside £1.0 million of debt to Simon Davies, with an annual coupon of 10%. The total issue of £8.0 million, with a three year term, was combined with equity, and warrants which also had a three year term. Each warrant was convertible into equity at a price of 10.4p per share during that three year term. The fair value of the warrants at issue is included within warrant reserve.

				2016		2015
				£'000		£'000
Liability component at 1 January				7,118		6,588
Interest and amortised issue costs				1,413		1,190
Interest paid				(545)		(660)
Debt paid				(7,000)		-
				986		7,118

9 Derivative financial instruments

	2016 £'000s	2015 £'000s
Derivative on shares issued on acquisition of Sidi Moktar licence	2,545	-

In March 2016, the Company signed a binding agreement to acquire PetroMaroc's 50% working interest in, and operatorship of, the Sidi Moktar licences. The terms of the acquisition included the issue by the Company of 21,258,008 ordinary shares to PetroMaroc as consideration. In September 2016, the agreement with PetroMaroc was amended such that should PetroMaroc dispose of the shares issued, the proceeds of the share price above 50 pence would be shared equally between the Company and PetroMaroc. The value of this derivative financial instrument was £2.5 million as at 31 December 2016 using the Company's closing share price of 74 pence.

During the year the Company recognised a gain of £583k in the income statements as a result change in share price from the date of initial recognition to 31 December 2016.        

10 Post Balance Sheet Events

On 19 January 2017, the Company announced that it had entered into a non-binding Heads of Agreement for the acquisition of all of Oil & Gas Investment Fund's (OGIF) assets in Eastern Morocco. The Company would purchase from OGIF a 20% interest in Tendrara, a 75% interest in Meridja (including the 55% interest in Meridja over which the Company had previously exercised an option) and an application for a 75% position in the relinquished area close to Tendrara. The consideration for the acquisition was 272 million new ordinary shares in the Company, with the issue of the new ordinary shares subject to shareholder approval.

On 19 January 2017, the Company announced that the extended well test of TE-7 on the Tendrara licence had been successful and the results were consistent with the Company's estimates. The Company also announced the commencement of civil works at TE-8 appraisal well site on the Tendrara licence.

On 7 February 2017, the Company announced that ground works at the Tendrara TE-8 well site, onshore Morocco, were complete and that the National 110 UE (1500 HP) traditional rig, owned by Saipem SpA and used by the Company in the drilling of Sound Energy's TE-7 well, had been mobilised. Drilling of TE-8 well was expected to commence during February 2017.

On 7 February 2017, the Company announced that as per the terms of the drilling rig contract for the Badile well, the Company had issued 830,565 new ordinary shares to Pergemine S.p.A (Pergemine) with a market value of approximately €790,000. The contract with Pergemine provided that 23% of the service charges due to Pergemine would be settled through the issue of new ordinary shares in the Company with a value of approximately €1 million. In the event of the Badile exploration well proving successful, further new ordinary shares will be issued to Pergemine to bring the total market value of the new ordinary shares issued to Pergemine up to approximately €1 million.

On 13 February 2017, the Company announced that it had entered into an agreement for the early redemption of the existing £1 million loan originally provided to the Company by Simon Davies, a former director, together with the simultaneous exercise of 9,615,384 warrants held by Simon Davies to subscribe for new ordinary shares in the Company at a price of 10.4 pence per share. The loan had a maturity date of 28 July 2017 but will be redeemed and cancelled on 1 April 2017 and the warrants will be exercised on the same date. The payment of the aggregate subscription price of £1 million for the exercise of the warrants will be deemed satisfied on the redemption and cancellation of the loan.

On 20 February 2017, the Company announced that further to the announcement made on 19 January 2017, it had entered into binding agreements with OGIF. The terms remained as announced on 19 January 2017. Shareholders approved the new issue of shares for this transaction on 15 March 2017.

On 15 March 2017, the Company provided an update on the drilling operations and noted that the third well (TE-8) at the Tendrara licence, onshore Morocco, had been successfully drilled to the planned coring point in the TAGI reservoir at a measured depth of 2,696 metres and the Company was completing coring operations. Gas shows had been encountered and the Company was continuing to complete the drilling operations and undertake wireline logging and analysis. The Badile exploration well, onshore, Italy, had been drilled to the first casing point and was now drilling towards the second casing point at 1,400 metres.

On 23 March 2017, the Company announced that TE-8 had been drilled to the final target depth and the Company would progress with data acquisition and analysis after which the results of the well would be announced. Drilling at the Badile well, onshore Italy, had reached the second casing point at 1,407 metres and would progress towards the third casing point at approximately 2,600 metres.

On 28 March 2017, the Company announced the completion of logging at the TE-8 well and that it had successfully identified and penetrated the full sequence of Westphalian sands in the Paleozoic (between 2,762 metres through to 3,120 metres) and confirmed the identification of the full sequence of thick TAGI reservoir sands (between 2,642 metres through to 2,762 metres) some 12 km to the north-east of the Company's previous two wells at Tendrara.

 

END

 

 

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